SMSF / SMSF Strategy

Transferring assets into an SMSF

One of the key attractions to an SMSF is the ability to move certain assets from outside the superannuation environment into the Fund.

Section 66 of the SIS Act, prohibits the intentional acquisition of assets (other than money) from a related party, however there are some specific exclusions including:

  • listed securities acquired at market value (only available to 30 June 2013)
  • business real property
  • widely held trusts; and
  • in-house assets (up to 5% of market value of fund assets)

The ATO have recently finalised their SMSF Ruling, SMSFR 2010/1 which looks at the application of subsection 66(1).

Transferring assets into super has long been common practice, whether they have been as a contribution (e.g. concessional or non-concessional contribution) or whether acquired from the member as an exchange of cash (for market value consideration).

I’ve outlined below a few important things to note or consider with each of the exceptions:

Listed securities

  • Listed securities is defined to include shares, options, warrants, bonds, debentures, rights, managed investment schemes or any other security listed for quotation.
  • An approved exchange not only includes the ASX, but also smaller domestic exchanges such as the Newcastle Stock Exchange (NSX) or Bendigo Stock Exchange (BSX).  It also includes international stock exchanges such as the NASDAQ in the US and the FTSE in the UK.

Business Real Property (BRP)

  • BRP must be used ‘wholly and exclusively’ in one or more businesses. It does not have to be your own business, it must simply be operating under a commercial lease arrangement.
  • Special rules apply to farmland, where up to 2 hectares can be used for your own residence without prejudicing the definition of BRP
  • The ATO have finalised a SMSF Ruling, SMSFR 2009/1 which provides some excellent examples of what is and isn’t considered as BRP

Widely Held Trusts

  • the definition of widely held unit trust is defined as 20 or more unrelated unit holders.

In-house Assets

  • Assets that can be transferred into super are subject to the 5% threshold.  IHA assets that can be acquired include:
    • shares in private companies
    • units in related unit trusts (except where trust held BRP – not treated as IHA)

I note that the acquisition of an asset from a member must be completed without any charge being held over the asset, therefore if the current asset is encumbered, that debt and/or charge must first be removed (or completed contemporaneously).   The only exception to this would be where the fund acquired any of the above using an SMSF instalment warrant.

CGT

The transfer of assets into an SMSF is a CGT event and will create a capital gains tax gain/loss for the individual or entity.  There are a range of strategies that can be used to reduce or eliminate CGT, including:

  • Deductible superannuation contributions (concessional) to reduce CGT, where member has met 10% rule;
    • subject to timing of contribution and future contribution limits, can use contributions reserve strategy to ‘double dip’ on the tax deduction in the year of transfer.  Need to consider timing of transfer. Refer to blog, “Help!! I’ve got excess contributions” for details on use of a contributions reserve.
  • Use of small business concessions for transfer of BRP where asset is/has been used within your business.

As a result of the Stronger Super reforms, the listed shares exception is to cease from 30 June 2012.  It was recommended and has been accepted that where an underlying market exists to buy and sell assets, then they must occur on this underlying market.

The only exception that I believe is lacking is the ability to transfer residential property into an SMSF.  I understand that the exception would need to be quite tight in terms of people not transferring holiday homes etc, however it appears to be quite biased towards commercial property (and I’m not sure why?).

I would be asked this question about transferring residential property into an SMSF almost weekly.  Only last week I was contacted about whether a person who was acquiring a residential property via an estate (father passed away) could transfer the asset into a SMSF.  I was then the bearer of bad news, but I can’t see why an exception can’t exist for circumstances like this?

Comments

comments

17 thoughts on “Transferring assets into an SMSF

  1. I have heard there is a way around transferring reidential property int SMSF providing you meet the CGT requirements.
    Julie

    • Hi Julie,

      I hate to be the bearer of bad news but superannuation law strictly prohibits residential property transfers into SMSFs. The ATO would have a field day throwing the book at any trustee looking to conjure up work arounds to the prohibition from acquiring assets from members.

      Regards,
      Aaron

  2. Is it possible to do the reverse. i.e. Sell Residential property from the Superannuation Fund to a member or Family trust. Obviously a market valuation would be required to determing the selling price.

  3. Hi Tony,
    I am 53 years of age and I have two residential investment properties which I would like to transfer into SMSF. Please provide an opinion on how I should proceed with this,

    Regards
    Jason

    • Jason,

      The answer is you are prohibited from doing this. Superannuation law prohibits acquiring assets from a member or related party. There are limited exceptions including listed shares and commercial property, not residential. These can not be gifted or purchased, regardless even if you did at market value.

      Sorry to be bearer of bad news…

      Regards,
      Aaron

      • Aaron,
        Thank you for a prompt reply. The abovementioned properties are indivdual name but the SMSF is under joint names. Due to this surely one can not be prohibited from transferring the asset to SMSF.

      • The application of super law here is looking at whether the asset is held by a related party of the SMSF (i.e. you, your spouse or other related party as defined by law). If this is the case, the residential property is not an excepted asset that can be acquired by the fund.

  4. I have a block of land with a mortgage attached. Can I build a house as an investment property on this land and place the whole package inside my SMSF?

    • Hi Aman,

      Importantly you can’t make an in-specie pension payment, therefore any transfer of the property must be done as a lump sum payment. This could be undertaken as a partial commutation from the pension, otherwise you would stop the pension and pay out the property as a lump sum.

      Regards,
      Aaron

  5. Hi Aaron,
    Can a SMSF acquire units from a member in a related trust whose sole asset is business real property used wholly and exclusively for business purposes that is leased to a related entity? If so, do the 5% in house asset limitations apply?

    • Hi Matthew,

      The short answer is maybe… you need to work through to see that it qualifies as an exceptions of section 66, SIS Act. You need to consider s71(1)(j) of the SIS Act an the requirements of SIS Reg 13.22C. If you work through these and conclude the it is allowable under s66, then it is ok.

      You will need to work through these requirements yourself based upon the particular circumstances of your client (i.e. we only provide general advice around these issues).

      Regards,
      Aaron

    • No, the only CGT concession that exists between funds is around marital breakdown. Based on your reasons within the question, I’m not sure why you need to move to a new SMSF?

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